UAE VAT Update – VAT Public Clarifications on “VAT-free” special offers
The Federal Tax Authority (FTA) has released new Public Clarifications on the VAT treatment of promotions where the seller absorbs VAT on promotional goods.
The FTA asserted that any promotional campaign stating that the supply of promotional goods is “VAT-free” is misleading as the seller is obliged to impose VAT on these supplies, except where the UAE VAT Law explicitly provides for zero-rating or exemption.
In this regard, the FTA clarifies that seller may choose either of two possible scenarios to absorbs VAT on promotional goods:
Scenario 1. Offer a discount equivalent to the amount of VAT
This scenario is commonly referred to as “VAT-on-us” promotions where the seller makes a commercial decision to absorb VAT to make the price of promotional goods more attractive to potential buyers.
In these instances, the seller is regarded as granting a discount to its customer which is equal to the VAT amount imposed on the promotional goods or services. From the VAT perspective, where the discount is granted, the value of the supply is reduced in proportion to the discount.
Practical Example: If a motor vehicle’s standard price is AED 105,000 and a special “VAT-on us” promotional price is AED 100,000; the seller is regarded as providing a discount of AED 5,000 to its customer.
Scenario 2. Offer VAT inclusive prices
According to the second scenario, the amount paid by the customer for the promotional good constitutes the VAT inclusive consideration even though the supplier may advertise prices as “VAT-free” in respect of retail sales as part of marketing promotion labelling.
Consequently, the onus will be on the supplier to determine the correct amount of VAT payable. As per the UAE VAT Law, If the price already includes VAT, the supplier is required to divide the price by 21 to find out the VAT amount. Subtracting this amount from the VAT-inclusive price will give the VAT-exclusive value of the supply.
Practical Example: If a promotional “VAT-free” price for the motor vehicle is AED 100,000, the consideration for the supply is AED 100,000. The seller is required to account for AED 4,761.90 VAT (VAT AED 100,000/21= AED 4,761.90) in the relevant VAT Return, regardless of the wording used in the promotional campaign.
Lastly, the FTA highlights that all tax invoices issued for the supply of taxable promotional goods or services shall include all tax invoice details as prescribed by the UAE VAT Law. For instance, the seller is required to reflect the rate of tax, tax amount, and the gross amount payable in AED for each taxable goof or services supplied on the tax invoice.
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